HILSENRATH’S TAKE
Turmoil in emerging markets last week sparked speculation among investors that the Federal Reserve might not scale back its bond-buying program as expected. But the Fed looks likely to stay on course with its plan.

First, it is not at all clear that meltdowns in the Turkish lira or the Argentine peso or an economic slowdown in China are due to the Fed. Yes, by Friday the selling in emerging markets seemed to catch fire in a way that might be associated with the Fed. The idea is that the Fed’s pullback from providing easy money threatens to reduce the hot money that has flowed into these markets. But there are also plenty of country-specific problems at play that Fed officials seem likely to look past, such as political uncertainty in Turkey and Argentina. Moreover, if the Fed were the driver of this selloff, why is it happening now, rather than in December when the Fed first announced its plan to wind down its bond-buying program?

Second, it’s not clear this selloff overseas is a problem for the U.S. economy or financial system, which the Fed is mandated by Congress to consider. U.S. stocks have dropped for a couple of days, but from high levels. Moreover, interest rates are under control as the Fed pulls back. Yields on 10-year Treasury notes have been falling, reaching 2.72% on Friday after starting the year near 3%. When the Fed decided not to pull back on the bond program in September, yields on bonds were rising, sparking worries among Fed officials that the pullback could short-circuit the housing recovery.

Third, the Fed tries not to overreact to events. For example, a weak jobs report for December hasn’t fundamentally altered the Fed’s view that the U.S. recovery is strengthening. It’s not clear that a market selloff which is only a few days old would change that.

In short, the Fed looks like it remains on track to pull back the bond buys another notch to $65 billion per month when officials meet Tuesday and Wednesday. They’ll surely discuss the emerging market selloff, looking for signs of broader spillovers. But it’s hard to see how China’s homemade woes, or Turkey’s or Argentina’s, at this point will make it to the top of the agenda

- By Jon Hilsenrath

MORNING MINUTES: KEY DEVELOPMENTS AROUND THE WORLD

Emerging Markets Currencies Tumble Again. The South African rand, one of the main casualties of the market shakeout at the end of last week, slid again. So did the Turkish lira, which struck record lows. A mix of local emerging-market strains, nerves over the fallout from the U.S. Federal Reserve’s plans to reel in monetary stimulus and patches of weak economic data from China have caused investors to pull back from riskier bets in recent trading days. On Friday, that morphed from localized selloffs to a broad flight to safety—a pattern that is persisting. http://on.wsj.com/LeaMjc

Asian Markets Selling Off. Japan was hit especially hard Monday, with the Nikkei slumping 2.5% to its lowest level in two months. The largest moves in 2013 though are in the widely-traded Hang Seng China Enterprises Index which tracks Chinese companies listed in Hong Kong, down 9.5% this year as fears rise over Beijing’s slowing and debt-laden economy. http://on.wsj.com/1eYv1vl

Draghi Offers Cautiously Upbeat View of Euro Zone. European Central Bank President Mario Draghi said Friday banks in the euro zone have taken significant steps to shore up their balance sheets, an indication that the central bank’s ongoing check of banks’ health is unlikely to be disruptive to financial markets and the economy. In remarks to the World Economic Forum in Davos, he said the euro-zone economy is on a path of gradual improvement. http://on.wsj.com/1hTnOhl Speaking on a panel Saturday, he said inflation across the currency bloc was and would remain low “for a very long time.” http://on.wsj.com/1chonAJ

EU’s Rehn Calls for ECB to Act on Inflation. European Union economics chief Olli Rehn on Friday called on the ECB to act on its 2% inflation target, warning that very low inflation in the euro area doesn’t support the bloc’s nascent economic recovery. “It’s important that the ECB continues its supportive monetary policy and aims at its inflation target,” Mr. Rehn said in an interview on the sidelines of the World Economic Forum in Davos. http://on.wsj.com/KTzk0x

More Inflation Needed in Europe. As Europe’s economy recovers from its crisis, afflicted countries such as Spain and Italy are trying to pare their debts while also becoming more internationally competitive. The trouble is, it’s hard to do both at once. And the euro zone’s weak inflation is making it even harder. http://on.wsj.com/1eXvQo6

Tucker Worries About Macroprudential Abuses. Are emerging economies’ attempts to control capital flows wise policy or “a misguided attempt to legitimize creeping capital controls under this season’s fashionable ‘macroprudential banner, while in fact avoiding…the need for more fundamental reforms?” Mr. Tucker . Is this just another way for countries to depress currencies to favor exports? His answer: It depends. http://on.wsj.com/1f68nzN

Michelle Smith Shapes the Fed’s Public Image. A profile of the director of the Fed’s office of board members. http://wapo.st/1enuQ9L

Tuesday:
- Turkey’scentral bank holds a special meeting of its Monetary Policy Committee and announces its decision at 2400 local time (2200 GMT). http://on.wsj.com/1aCcarC

Wednesday:
- The Fed’s policy committee concludes a two-day meeting and is on track to reduce its bond purchases by an additional $10 billion to $65 billion per month. The decision will be released at 2 p.m. EST (1900 GMT).

- The Reserve Bank of New Zealand’s policy announcement at 2000 (GMT).

Robert Samuelson’s Verdict on Bernanke: Facing turmoil and danger, he helped stabilize the economy and reassure the public. His hallmarks have been competence, candor, decency and dignity. He was the right man at a fateful juncture. http://wapo.st/1eqOJgf

- Italy’s parliament gave a green light to a new law on that revalues the capital of the Bank of Italy, which is mostly owned by Italian commercial banks, and sets a 3% limit on stakes that individual investors can own in the central bank. http://on.wsj.com/1bmV37C

- The rebounding U.S. housing market faces headwinds. Mortgage rates are expected to continue to rise, low inventories may continue to restrain growth, as could new mortgage rules for lenders and borrowers. http://on.mktw.net/KVY6x5

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